Posted
by
timothyon Sunday December 30, 2012 @01:20PM
from the series-of-tangled-webs dept.

McGruber writes "Possibly the wierdest tax-writeoff of the year happened when Meg Whitman claimed that her US-based multinational corporation HP had been defrauded by British-software firm Autonomy; Ms. Whitman and HP claimed an 8.8 billion dollar write-down. As the Los Angeles Times explains, 'HP acquired Autonomy in 2011 for $11 billion, a move it hoped would turn it away from its dependence on sales of computer hardware with its low profit margins, and into the more profitable business of software. However, the price HP paid was widely criticized for being too high, and in part led to the subsequent ouster of Chief Executive Leo Apotheker.' The wierdness continues — in its annual report filed with the U.S. Securities and Exchange Commission, HP claims that the U.S. Department of Justice has opened an investigation into HP's allegations that HP has uncovered widespread accounting fraud at Autonomy. However, The Guardian points out that former Autonomy CEO Mike Lynch claims that HP 'is watering down the accusations it had levelled against him over the accounts filed by his old software company.' Mr. Lynch also says that he has not been contacted by the U.S. Department of Justice, which HP claims is investigating the alleged fraud. Perhaps Slashdot's users can help make sense of this mess and help explain it to me?"

Perhaps Slashdot's users can help make sense of this mess and help explain it to me?"

You don't have to delve too deeply into this one, to be honest. The company took a risk. It lost at the gambling table. Badly. And now it's looking for someone, or something, to blame. And the only way to reduce their debt load without screwing someone over a barrel is if some vaguely-defined "fraud" is found in the accounting books, thus saving HP of a lot of tax money and reducing the liability. Everything else is smoke and mirrors.

The CEO at the time, if I am remembering correctly, previously worked at SAP, and wanted to transition HP (a company by and large built on hardware) into a software services company. I guess he either missed working at SAP, or thought that HP should pull an IBM.

Because his vision was so...mismatched for HP, a lot of bad ideas were thrown around. To put things into perspective for the common man, it's like buying a baking company, and trying to turn it into an agricultural company -> true, baking and agri

- - - - I forgot to note that HP did gave serious software development and consulting operations for a long time. How do you think the got HP-UX and MPE going. Then, OpenView, Allbase SQL and many more.- - - -

Those are all infrastructure components however. Much as I love infrastructure, software and systems that actually execute large-scale business processes are an entirely different branch of the evolutionary tree. And generally much, much harder. HP developed the HP3000 and MPE, but it was ASK that

Yes, Apotheker worked for SAP prior to joining HP. By many accounts he didn't do a terrific job at SAP. When he got to HP he quickly realized that the company was mired in a low margin business and correctly summarized that services was the place to be. Unfortunately they paid way too much for EDS. IBM snagged PWC for about a 1/4 of the price that HP paid for EDS and PWC was a more prestigious firm. Dell then made a similar mistake by buying Perot Systems for a similarly inflated price with the goal of also

This is a useful overview, but it doesn't cover the details of the confusing part.

My take is that the whole DOJ angle is part of HP looking for a scapegoat to cover both their own mismanagement and lack of ability to due anything useful with Autonomy's IP. It's a fishing expedition to find one, but they have no hard evidence yet of who's to blame. Autonomy itself used aggressive accounting measures to inflate its sale price, as all companies being acquired will try to do. What HP really wants is to ignore the whole thing and write off the loss, since catching any accounting mess should have happened before the purchase. But they can't just do that due to class action lawsuits saying it's HP who is at fault. So they're going through the motions of prosecuting other people to shift the blame, but so far they don't have any hard evidence of that fraud. If they did, they'd be leading with that.

Here's how I sequenced all the events here to sort out what happened:

August 22, 2012: earnings are terrible, and we're going to blame the Enterprise Services division.

November 20, 2012: The scapegoat picked for the bad performance of Enterprise Services is the Autonomy aquisition. HP wants to write off a 8.8B loss right now for that. They can't admit "we fucked up", so they blame accounting issues at Autonomy.

November 21, 2012: The U.S. Department of Justice is called in to help push blame toward Autonomy, along with the U.K. Serious Fraud Office (Autonomy was originally a British company) and the SEC.

November 26, 2012: a class action lawsuit [stanford.edu] is filed by HP stockholders. That claims this is all bullshit, and HP itself is the source of fraud here. Similar class action lawsuits are filed against the accounting firms involved [yahoo.com].

December 28, 2012: Former Autonomy head Mike Lynch points out that HP hasn't actually given out any detailed accounting for where that 8.8B figure comes from. And the US Justice department hasn't actually gotten him involved in things yet.

It may be the case that HP's forensic accounting here finds something lawsuit worthy. It's telling that so far, all they've done is contact the DOJ. If they had a smoking gun, they'd have sued the responsible partly directly instead. That's why I suspect this is just fishing without solid evidence so far.

Moreover, it incorrectly implies that Enterprise Services is Autonomy. The first hammer to fall in August was the write down of $8B for the acquisition of EDS --- NOT Autonomy. The November write down of $8.8B was for Autonomy.

The only thing clear here is that HP had a mess of losses associated with Enterprise Services, and that the first hint that things were really hosed was when they identified EDS as the reason for the first $8B+ write down.

It becomes much clearer when one understands that the quote in the summary attributed to the former Autonomy CEO, Lynch, is actually from the Guardian. And, that "watering down" doesn't mean what the Guardian thinks it means (if one waters down an argument, they make it weaker than it actually is). Assuming someone got something right, what Lynch actually said was "Simply put, these allegations are false."

Well, yeah...it's HP we're talking about. I mean, this is the company that spied on journalists who didn't say nice things about their products. Anytime you have a company that gets dragged before Congress to account for what they've done, you know something's wrong. Anytime you have a company whose actions resulted in new laws to clarify why what they did should be illegal, you know someone's willing to play around with the fine line between simply immoral and actually illegal. And people that make such distinctions...or think they count, in an ethical sense, are nothing more than intelligent lowlives.

Well, that too, but it's a lot more complicated. There are several things going on:

Meg Whitman is doing something that competent CEO's do routinely, and HP hasn't done in decades, which is cleaning up the books and writing down the value of non-performing assets, like brand names that will never be used again, such as "Compaq", "EDS", "Palm" and now "Autonomy". There's still "3Com" left to go...

Whitman is also playing the CEO spin game, which is that when you have bad news about profitability, you pair t

One would think that with a large enough user base making enough explanations that the correct explanation is indeed given. It is no fault of the ground that from the crowd upon it all you hear is cacophony.

Furthermore, it is not incorrect to say that any one of us commenters is indeed capable of explaining things to the submitter. Note: they stated no requirement for the explanation to be correct. Perhaps their cacophilter is tuned to select the most likely of explanations such that they may assemble

I agree, provided that the user base is infinitely diverse. However, this is/., and so it is not. Hence my infinitely snarky sarcasm.

Seriously, I'm just weary of the infinity of speculation and judgmentalism that achieves the status of "information." This kind of post only serves that ilk, so I apologize if I felt moved to snark on it, but alas I must lower my expectations for the new and uber-gossipified/. since the passing of Rob Malda, who seriously must have passed away else he would not have let this

I'm pretty sure I could start a flamewar with a suitably crafted post about date handling in Java. And at least start a discussion about the accuracy of dendrochronology when used in conjunction with C14 dating.

Or, and this has just occurred to me and might be a bit way out for Slashdot, are you thinking of the art of persuading another person to drop his or her underpants in an intimate setting?

Once in a blue moon someone might have the exactly relevant facts (which I still think might be a load of BS) but I come to the comments to see the interesting side comments where people might say things like, "HP makes a big load of crap except their Model X is a hidden gem at half the cost and twice the power of anything else" Or "I stopped buying HP servers because company X makes this brain dead simple blade server system with each server coming in at $199..."

HP wants to be what IBM used to be (and still struggles to be), the single source provider for their customer

Autonomy looked like a great opportunity, but just like inexpensive hardware has undercut high-end server sales, open source solutions and tens of thousands of developers using those tools have undercut their market and dimmed the rosy projections that made HP willing to lay down so much cash

I think that this is less about Autonomy's shrinking value and more about HP's willingness to pay any price to enter new markets and their failure to recognize an opportunity to drive down the selling price by being willing to walk away from the deal

On Autonomy's part, they 'enhanced shareholder value' and returned a greater profit to them by negotiating the highest selling price possible, Do we really expect corporations to behave differently?

During the acquisition process, the buying company goes through an extensive process of due diligence done by an army of professional accountants. They shove the financial books and records of the company they are buying under a scanning electron microscope, and take a big whiff to see if they smell anything fishy.

So, the real question, is, why did this alleged fraud just turn up now, and not during that process . . . ?

I think the "army of professional accountants" is part of the problem, not the solution. Financial records are about what happened in the past (though the order book is about what should happen in the future, there is no guarantee that the future will be a continuation of the past).

Paradoxically, crowd sourcing an opinion through something like Slashdot might actually be more accurate - how often have you thought a proposed merger,flotation or acquisition stinks, and so it proved? Geeks often do have inside

All the best bits of HP were spun off by Carly into Agilent Technolgies, and to me they are the true Hewlett-Packard and not the faceless box-shifter that bears the HP name today.

I used to work in a lab a number of years ago, and almost all the instruments were made by HP. Whenever we were purchasing new equipment, we didn't even consider the competition because we knew we were getting the best. Also, whenever new instruments were purchased, they always came with HP workstations and printers.

I think that this is less about Autonomy's shrinking value and more about HP's willingness to pay any price to enter new markets and their failure to recognize an opportunity to drive down the selling price by being willing to walk away from the deal

I tend to agree. HP should have expected aggressive accounting here, and gone in with eyes open. Buying Autonomy was not a terrible idea, but it always boils down to price.

In the Valley, a valuation of 5X or 6X gross revenue is pretty healthy for a strong adolescent startup that is growing in a large company. Autonomy was priced at 10X IIRC. That is not unheard of, but it is an "aggressive" price that sets sky high expectations. At that kind of lofty valuation, 20% annual revenue growth is failure.

Ever since HP bought Compaq (a deal that brought them nothing that they didn't already have) for more than the Chinese later paid for BM's PC division, they have been on a downhill spiral. And the cause of the decline seems to survive by telling the board "don't fire me now, you need to see this through". Meanwhile she keeps taking millions for an inability to run a once great company.

Meanwhile she keeps taking millions for an inability to run a once great company.

Hewlett Packard split into two pieces a long time back: one became HP, the other became Agilent. HP got the PC/inkjet/etc. part of the business. Agilent got the "cool" part of Hewlett Packard - you know, oscilloscopes, logic analyzers, etc., etc., etc.

"HP" hasn't been a great company since Agilent was split off. Agilent, on the other hand, still makes great equipment for electrical engineers (and more.)

Not quite so, as they had a robust server market for HP-UX on the high end with its lucrative services market. Yes, that has been dying to Linux recently, but it was a cash cow for a long time after the Compaq purchase. Compaq itself died from making the massive misstep of buying DEC, which had started making the transition to services (and incidentally part of the eventual appeal of HP buying them). HP has continued to move into services, acquiring EDS, which had dumped almost all of its non-services based

Every time that I speak with an HP hardware rep they spend all of their time pushing the integrity/Itanium servers for about 10x the cost of the (formerly Compaq) proliant x86-64 line

They are wasting their breath, when we finally moved out the last of our DEC/Compaq Alpha servers we switched everything to proliant/operton servers running SUSE linux for our databases and blade servers (with lowest total cost per core) for vmware

I would have loved it HP had seen the looming failure of Itanium and Alpha was de

I before E, except after COr when sounded like "A"As in "neighbor" and "weigh"Except seize, inveigle, either,Weird, leisure, neither.

(Also science, conscience, sheik, ancient, being, caffeine, feisty, forfeit, protein, species, and several dozen others, including "Einstein"--twice! The amazing thing about the rule is that it works at all. It seems as if it all the exceptions are words whose spelling is so familiar that you never stop to ask...)

About 15 years ago I was buying an HP printer from Canada's equivalent to Best Buy and they were trying to do the usual crap warranty upsell. I told the guy, "For $10 off I'll take an HP product with no warranty." That was 15 years ago. I recently opened a cheap little HP inkjet and the included black cartridge had zero ink in it. I don't mean it had dried out but it had never contained ink as I cut it open and found no sign of ink. I didn't flip out or was even a tiny bit surprised. This is what I expect from HP products.

The same with HP laptops; I expect a mountain of bloated trialware that will be a huge pain to remove and a variety of other cheapnesses such as the whole split left shift key thing.

I also buy servers and with no experience at all with HP servers would simply not touch them with a bargepole due to my experiences with the rest of their product line. But back to their older products. I know people with older(10 years+) laserjets that just keep going and going; while I know others with newer colour laser jets where the red is fading due to dust buildup on a mirror buried deep inside the machine.

And don't get me going on the prices of toner and ink. So my guess is that HP is a company run by MBA types "proving" all kinds of "facts" using spreadsheets while leaving the basics such as loyal happy customers in the dust as those things don't spreadsheet very well. If you are wondering what I mean by the misuse of spreadsheets think about this scenario: You are HP and you have some new trialware product to add to your latest laptop. The product looks like it will make an average of $16.95 per machine. You expect to sell 300,000 units. Well that works out to 6 million dollars. Then you add another trialware column, and another, and another. Soon those machines are simply printing money. But how do you calculate the number of customers who will never buy another HP after realizing that they basically just bought the electronic equivalent to postal junk flyers? Not so easy to put that into a spreadsheet; you can but it tends to be built on more fuzzy information that can be tainted with optimism. My personal guess is that a goodly portion of high priced Apple's sales are built upon people seeing a machine that didn't come with Norton AV and its bloaty brethren. These technologically unsophisticated people then reason that it is worth double to not get this crap. I like Apple products so I am not casting aspersions and I also know that there are many other reasons people buy them both worthy and shallow but I know many people who have no inclination to waste one second fighting with their machine and value their time accordingly.

So when I hear that HP is squabbling over $11 billion that would potentially be detectable from the proper use of spreadsheets (accounting) I just laugh like a drain.

You just hit the nail on the head of why customers and employees of once great companies now hate those companies. Their management knows little to nothing about the business itself, they only know how to look at a spreadsheet and run a trend chart. At my last job, we spent most of our time making charts go up and boxes turn green. These had little to no positive effect on our business and often just made things worse. If things got too bad, we'd just make up numbers or manipulate them in such a way as to make them what the managers wanted. Since the managers didn't know anything about the real world happenings, they were none the wiser. A terrible way to run a business, but it seems that's how most are run nowadays.

Of course, "customers cursing on product already bought" cannot be measured, so the MBA crapper ignores that aspect and continues to implement some "money-saving" scam.Three years later he MBA crapper is surprised his company has been "developed" into the economic crapbin.

But that rot started when Dave Packard forgot the purpose of his little company and accepted money as the sole determinant of success. In his book he praises the MBAs. Companies have a useful

yeah, damn the MBA's... oh wait I am one, but then I had already been working in software development for over a decade before I chose to learn about the dark side

The business education was painful and enlightening. It was both maddening in how companies rate investment against perceived roi (no business person would ever fund pure research with no clear return on investment over what they could make just shutting down research in favor of a stock portfolio) and troubling (how business 'ethics' has been tra

HP paid $11bn for Autonomy, despite Autonomy showing only $3.5bn of total assets (as of June 2011). HP recorded nearly $7bn of Goodwill (difference between the price HP thought it was worth and what the rest of the market thought it was worth) and surprise, surprise the market knew better than HP.

HP's story simply does not stack up - it would mean Autonomy were fiddling their books to the tune of $5bn on a $3.5bn balance sheet. Much more likely is that HP vastly overpaid and are now trying to shift the blame, I'd expect these charges to get even more diluted in the near future.

From what I understand, they were counting service contracts as sales for that year instead of splitting it up over the service life of the contract. Apparently in US bookkeeping these need to be handled like depreciating assets and accounted for over a period of time (or that's how I understood it). Since Autonomy makes a good chunk of its money on contracts, that could add up fast.

But that is accepted practice in the UK. In any case HP had two accounting firms involved in auditing Autonomy plus their own management team. If they didn't realize what Autonomy was doing and why then they can only blame themselves and their accounting firms. (Assuming they didn't see it and tell HP about it. Which isn't likely.)

Ignoring all the bad decisions HP has made over the past 20 years, HP simply doesn't want to pay too much in taxes. Other large corps, like Intel, have used the multi-billion dollar write-down to escape taxes, course the rest of us will end up paying more.

The rate HP is going, they'll get their wish all right. You don't have to pay any corporate taxes at all when your company doesn't turn a profit - pretty soon you will never have to pay corporate taxes ever again.

Like most big companies, HP is running out of new CEOs to find 'problems' to correct to 'explain' lack of profit to shareholders. What is fundamentally wrong is that in any given market, costs are likely to go up over time. You cannot sell the same product for the same price over quarters or even years. Technically you get around this by either introducing 'new' products with 'new' features or you pad some aspects of your business from other aspects.

HP paid 11 billion dollars for something. They are now claiming it is actually worth 2.2, and that difference is accounted for by fraud on the part of the seller (essentially lying in their books to hide what it was actually worth). It's like going on a date with a girl and telling her you make 100k a year when actually you make 70. Or, as the case may be, telling her you make 110k when actually you make 22.

The fact is, that Whitman is a worthless MBA. She has left a trail of destruction, except at e-bay. Of course, e-bay had such a good thing going, that it was not surprising. But, HP is being brought down by her, similar to the way that IBM and others are going down.

She's the one cleaning up the mess, not the one that made it (though how well she's doing is certainly open to debate). That credit goes to Leo Apotheker, who, as the summary pointed out, was ousted largely due to the whole Autonomy buyout that he oversaw, but that was far from the only mess he made; he was also the one who announced plans to shut down HP's PC business. Whitman is just trying to put as much distance between the company and that deal as she can at this point, that way they can move on.

As for eBay, she started there when it only had 30 employees, so it's not like she came in when it was the massive (though garish) success it is now and just kept it running. And what destruction has she left behind elsewhere? Last I checked, after she left eBay, she more or less took a break for a few years, serving on the boards at a few different companies that seemed to do rather well with her helping them (e.g. Dreamworks). And since coming on as CEO at HP, she's been systematically undoing the damage her predecessor did before he floated away on a golden parachute. Whether or not she's succeeding is not something I want to argue, since I don't think I'm well-informed on that subject, but it looks to me like the blame lies elsewhere, and that she's just trying to get them out of it.

I'm not a fan of Whitman either, but let's at least be fair in our treatment and rely on actual facts, rather than generalizations that don't seem to line up with reality.

Whitman had very little to do with ebay's success. They were 6 months from going IPO when they brought her on board. As it was, the company was already established and growing. During her time, she grabbed paypal and then over the next 5 years, paypal's reputation went downhill.
In 2005, she bought skype for 2.6B, and then sold a large % of it 5 years later to andreson for a about 2.75b. IOW, it made them no money.
In fact, shortly after she left ebay in 2008 to jump into politics (failing at that, thank g

An MBA is a degree, not a person. Apparently to you going to school to learn about the techniques of managing a business somehow magically leads to a person becoming evil and stupid while clearly all engineers are paragons of honesty and competence by comparison. [/sarcasm] Grow up.

She has left a trail of destruction, except at e-bay

What "trail of destruction"? The only major company she has been in charge of prior to taking over the helm at HP is eBay which has pretty much been an unmitigated financial success. She came to eBay when it had 30 employees

Then you are obviously an MBA who does not have a single fucking clue of what you talk about. MBA's are now taught to pursue the short-term stock gains so that they can get their options converted. Then before the company goes down, they head out. MBA's used to be about examining companies and providing advice to engineers and others that actually UNDERSTOOD the industry. Now, we have idiots like Fiorna, Whitman, Hurd, Immelt, Welch, Rometty, Palmisano, etc. Basically, all of these idiots do not have a clue

In the tech industry, profits are fleeting. Deals are long term. At least, they used to be. When I worked at HP back in the 80's, we owned our own plants. We owned the production lines. The engineers upstairs could walk downstairs and see what was going on with production. If there was issues on the equipment, it was known right away. As a software engineer, we worked on these systems. We had access to all of the latest items in prototypes.
BUT, most importantly, it was 100% OURS. The IP remained with HP.

I think he's using the term "watered-down" to mean something like "with increased volume", but of course the usual meaning (what you find in the dictionary [thefreedictionary.com]) is exactly the opposite: "diminished in force or effect".

HP are complaining that they were defrauded of between 80 and 90% of what they paid for Autonomy. On a ten digit deal, surely they employed all the best accountants and lawyers around to check it out? I mean, $100 million on advisers is still only 1% of the deal. If they did, why are they not suing these advisers (possibly as well, but certainly first)? If they did not, they they really have only themselves to blame and all concerned (not just the top man) should be ejected without parachutes.

The buyer did 'due dilligence' on audited accounts. After audit, only target is auditor if accounts are illegal. However as always caveat emptor applies. This is a shift the blame try, which may rebound on HP.